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Wednesday, February 6, 2013

North Carolina has new Republican majorities in both the House and the Senate. With a new Republican governor, North Carolina has Republican control of the reigns of government for the first time since Reconstruction. The outgoing Democrats have left North Carolina with a $2.6 billion debt that it owes to the Federal Government for unemployment expenditures. Since the recession NC has had higher than the national average unemployment. Additionally, NC has had generous benefits (greater than our neighbors) that last for 26 weeks (that's half a year). So when the economic recession settled in NC, the pool of unemployment funds were quickly drained. The Democratic majority in the legislature and Democratic Governor had a choice to either reduce the outflow of funds or find a new source. Their solution? They decided to borrow the money from Washington D.C. As a result, we now owe $2.6 billion and the unemployment rate is still above the national average.The new Republican Governor and majorities in the House and Senate are moving legislation through each chamber that will reduce the "benefits" and shorten the span from 26 weeks to a range of 12 - 20 weeks depending on the state of the economy. Such a plan will quickly pay off the debt and put money back (about $2 billion) into the unemployment insurance fund.In economics, there are two axioms that everyone should be familiar with. The first is if you want more of something, use taxpayer dollars and fund it. The second is if you want less of something, tax it. What is unemployment insurance? Well, it certainly is not insurance. What is insurance? It is a method to reduce risk. It helps alleviate the cost of something bad happening. In order for insurance to work, we need to understand class risk. Class risk means that I know that a certain percentage of people will be affected by something, but I couldn't tell you who in particular. I might know that so many people will get cancer in a given year or that a certain percentage of people will be killed in a car accident in a year or so many homes catch fire, etc. Since I know the percent of people harmed, I know the risk. We can then pool together the funds and help offset the cost of the event. Suppose that it costs $100 to set a broken bone. Further suppose that there is a group of 10 of us who fall into the risk class that says one of us will break a bone once this year. Each of us then contributes $10 to the pool, for a total of $100. The "winner" is the guy you breaks a bone. The "losers" are those that do not. So when it comes to insurance the "winners" are those that get cancer, those who are in car accidents, those who homes burn down, etc. The "losers" are those who pay into the fund, but nothing bad happens to them.So let's apply this reasoning to unemployment "insurance." First, can we identify risk classes? No, not really. Can we estimate how many will lose their job in the next year? Again, not really. With many insurances, we can modify the risk class we find ourselves through our behavior, like good driving vs. a record of drunk driving. Is there any consideration along these lines for unemployment "insurance"? Sadly no, like most government things, it's one size fits all. Finally, am I paying into the fund that I am insuring against? Yes, but it is subsidized by those who don't work. I don't simply mean the unemployed, I mean those that don't have a job and do not want a job. To the extent that funds come from the General Fund, those that pay sales tax, the gas tax, etc. are also paying into this fund.If unemployment "insurance" isn't really insurance, then what is it? It is simply a transfer payment to those who meet the government's definition of eligible recipient. And now, finally, we can apply that first axiom, which is if we want more of something, have the government pay for it. If we want more people unemployed, pay them not to work. If we want people to be without work for week after week after week, pay them week after week after week.The critics of the new governor have asked him to try to live on $350/week (the new proposed rate). However, they miss the point. This transfer payment is not supposed to replace work. It is to help offset the cost of an event, losing one's job. People respond to incentives and if the cost of being unemployed is high, those people will be highly motivated to take the next job out there. If they are not highly motivated, they will wait until the "perfect" job comes along. The reality is that the "perfect" job does not exist. The reality is that you take the next job (which will pay less) and you work up the ladder again.It is only by using the natural incentives found in the market will the economy recover. The market will put people back to work. We just have to let the market do its job.